Business Breakdowns
· Arthur Olson
[00:00:00] S1: I think that's fair. You look at the customer outcome. So we talked about account balances roughly 5x-ing over the last three years. Let's make it a hard comp. Let's look at the peak in 2021. We're still 2x that level. And if you decompose the growth, it's really, really healthy. Half net new deposits, and then it's half organic appreciation of the assets in the account. And what that shows you is that investors are making good decisions. Again, these are not day traders that are blowing themselves up. If they were, you just wouldn't be able to get the asset growth that they're showing. And then on the other side, the really healthy net new deposits show that Robinhood is becoming a higher mindshare. It's a platform that they want to add assets to, that they want to make a bigger part of their financial life. The proof is in the pudding in terms of their customers doing well. There's a great book. Charles Schwab wrote an autobiography called Invested. It came out in 2019, and it was fascinating to me. He disrupted the industry in 1975. They deregulated commissions, and it birthed this whole industry of discount brokerage. And Schwab was the most successful. And to see the smear job and attacks that the legacy guys aimed at Schwab, it's very similar to the narratives that have been promulgated around Robinhood a couple of years ago. It was about gamification, and you need to take this almost paternalistic view of the customer can't be trusted to have choice. We need to make that choice for them. A lot of those same arguments were put against Schwab, and he talks about it a lot. And I think in a lot of cases that's covering up for either the legacy guys want to protect rent-seeking monopoly in one way or another, or it's just a lack or an inability of innovating. A lot of these legacy guys, we know, are on ancient tech stacks and have grown through acquisition. So you've just got this nightmare trying to integrate on the back end. One great example is crypto. Robinhood introduced crypto, actually being able to buy a token itself, in 2018. Fidelity was obviously slower, but in 2022 I think they launched for institutional clients and then 2023 for individual clients. Schwab still hasn't. It's coming in 2026. And you could say, well, maybe that is a paternalistic view.
· Arthur Olson, Matt Reustle
I also think there's probably something technologically on the back end that's an issue. The success points for the customers speak for themselves. In general, it is better to empower customers with choice and variety and let them make decisions. [00:00:00] S0: It's always difficult to take a legacy incumbent's arguments against a new entrant, an outsider saying it with validation. You always have to think with a bit of skepticism towards that. And we see it across industries. [00:00:00] S1: There's a perception that Robinhood is always pushing the envelope in terms of the riskiest things. It's actually not the case. And you look at crypto, so they were early to offer crypto. They only offered the 10 most liquid biggest names. If you look at Coinbase, they're offering 250. Now obviously that is their business. But Robinhood could have done the same, but purposely held back because of regulatory uncertainty. I think that's one of the risks here, is making sure that you don't put irresponsible products in front of your customers. Prediction markets is really the only one where I have even a tiny bit of a question. I think there might be a little bit of risk. [00:00:00] S0: How so? I'm very curious.
· Matt Reustle, Arthur Olson
[00:00:00] S0: How so? I'm very curious. [00:00:00] S1: It's more reputational. Prediction markets are super interesting. The idea of being able to express a view about a real-world event, and then even more interesting is the idea of being able to harvest that data. I think this market's going to get way bigger. The thing I didn't see coming and that I don't maybe love is that sports betting has become this lightning in a bottle use case, and Robinhood obviously makes that available on the app. I don't see anything wrong with that. The way I think about it is it's going to be a very small percentage of revenue, even if it's very successful. We're talking about definitely sub-5%. But where I think it's valuable is again providing choice to customers. And each of those different assets become a different on-ramp. And it really is a customer acquisition strategy. One of the interesting things that I didn't even realize was the whole meme stock hysteria was motivated by, I don't think, great investing decisions. Buying GameStop at whatever the crazy valuation was was not a good choice in the long run. But customers came to Robinhood to do that. And 80% of the customers that came on during that year are still with the company. And by all indications have become real investors. So investing, as we know, is very much a process of learning, of experimenting and playing. You have to have some of that. But the key is to keep them in the platform and get them focused on equities and options, which are the real wealth builders.
· Matt Reustle
[00:00:00] S0: It's definitely going to remain a topic of interest. You could slice it in so many different ways, but it's interesting to hear some of the details in terms of what they've rolled out, how they've rolled out, your perception of where there is risk, where there is a very reasonable approach as it relates to sports betting. I have always been a free markets person. There is some lack of friction associated with that, which makes me a little bit uneasy, but nonetheless not for me to decide. If we're to go back to now what the business looks like from revenue streams, I think you mentioned you have the payment for order flow, you have the interest income sweep. Are there any other big buckets today or potential big buckets in the future that can materially change the profile of the business and really the size of the business, be a material earnings driver?
· Arthur Olson
[00:00:00] S1: We expect both of the sides of transaction and net interest income to scale with account growth. Robinhood is doing so many things at once that you have to pick what matters most. But we have followed the fintech world for quite some time, and we think Robinhood is rolling out a banking offering at the end of this year. It's going to really ramp up next year. We think that is going to be very successful. Specifically a banking high-yield savings equivalent and then also a linked credit card. We think that has the potential for customers that attach to basically double ARPU. So ARPU today is about $150. If you look at some comps, I think SoFi is a good comp in terms of even the strategy and the way they've executed. Robinhood is going to look like that, but they have even better cards. But you can back into $125 to $150 ARPU from that banking and credit card business. The reason that we feel that they are advantaged is primarily around the engagement data. There's a war for eyeballs. We all know that. There's a consolidation of attention around a couple apps. Realistically, particularly with younger generations, if multiple financial services can be accomplished in one app, I think that's where the world is going to move to, assuming product parity and assuming strong brand. Again, we think Robinhood is the beneficiary there. But if you look amongst users, Robinhood customers spend about two hours in the app per month. That's about twice as much time as a Schwab customer, about four times as much time as Fidelity customers. But what's really interesting is it's like 5 to 10x as much time as other financial services apps, the legacy banking apps, also the peer-to-peer payment players, Venmo, Cash App, also the buy now, pay later players, and then also these neobanks like Chime. And we think that is very powerful. Banking is something that every consumer fintech at some point says we want to go after that, we want to try to get deposits. So we usually have our on-ramp initial product. The ones I just laid out: peer-to-peer money transfer, buy now pay later, some other form of lending, and then some that are just trying to come straight out of the box as a neobank. And then you have brokerage. We believe brokerage is very advantaged here. One, because of that engagement point. The second is its core business.
· Arthur Olson
So brokerage is very profitable, $150 ARPU. If you look at somebody like Cash App, which we've invested in Block in the past, it really came out of the gate very strong. One of the core problems was that peer-to-peer money transfer is a loss leader. You don't actually make money on it. You actually lose money on it. So you're fighting the more your customer uses your product, the deeper your hole is. Brokerage doesn't have that issue. One of the really important things is setting up incentives, having a war chest to fund incentives to get customers to make the right choices. The big holy grail is getting direct deposit to have customers deposit their checks on a monthly recurring basis into your account. SoFi has actually been pretty successful. They didn't have great cards, and it's a real credit to Anthony Noto and that team for executing as well as they have. We see Robinhood in a position to be very generous with incentives. They've already done this on their IRA product, which has been growing like a weed. And they are giving a 3% match on your annual contribution, way better than anybody else in the industry. And actually going back to our original frame of Robinhood disrupting based on economics and then on product, that's the economics piece in terms of being very generous on the IRA match. But then also, I think they're the only retirement account that has ever received a design award. They did receive that award. We see the same framework coming in making them successful in banking. It brings us to this question too of the gold subscription, which is another thing that smooths out the revenue profile of the business. Gold subscribers in the most recent quarter grew about 75% year over year compared to total accounts growing 10%, which is very powerful. And we see the Amazon Prime model of packing a ton of value behind a very cheap, very affordable subscription as a means of consolidating in Amazon's case, spend, in Robinhood's case, consolidating your financial life. More assets on platform to take advantage of the benefits of gold. It's $5 a month, so we're talking about the price of a cup of coffee. You get industry-leading yield on your bank balances. So think about it like a high-yield savings account, industry-leading cash back on the credit card. So 3% across the board rewards, free market data, better margin rates.